Category Archives: Economics

Reality Check. Always Certain But Frequently Wrong.

One of the benefits of being a student is that there is always someone standing over your shoulder, watching the choices you make. In school you choices result in a score of some sort. Out in the world, your choices have bigger consequences than letter grades.

As in school, the Big Big World is always under time pressure. Better, Faster, Cheaper. There isn’t always time to deliberate on the global optimum solution. In industry, sometimes the choice you make is the first one that shows any promise. Experienced business people know that everything takes longer and costs more than you first realize. There is no substitute for an early start.

What results from this need to jumpstart a project is the failure to question your basic assumptions.  In chemistry, a person may slide into the seductive notion that you are an expert in a process and, of course, you know that your process will work on a particular analog. But, do you really?

Non-linear phenomena are particularly troublesome.  Or phenomena that are polynomial in description.  It is hard to intuit outcomes when terms that were previously small become dominant in the equation. There is no substitute for measurement. If you want to truly understand a thing, eventually you are going to have to make measurements and plot a curve.

Like a lot of people fresh from Grad School, I was sometimes an arrogant turd. Just ask around. Today I am much more cautious about my abilities and knowledge. Periodically I am reminded that intuition can fail. Like a 2×4 between the eyes.

While I can’t give details, I have had to drastically recalibrate my intuition about some things that I believed I had a handle on. It involved mass transport concepts. The separation of substances can be subject to constraints that aren’t so obvious to someone who has only been through the ACS-approved chemistry curriculum. An engineer might have looked at my circumstance and solved the problem in a New York minute.

But Th’ Gaussling had to learn the hard way. What else is new?

On Chemical Negotiation

I always amazes me how little negotiation goes on in chemical B2B transactions. Buyers ask for the price of an obscure chemical and that may be the last you hear from them. Only rarely do I see pushback. Either a purchase order arrives or it doesn’t.  I’m not referring to trainloads of soda ash or other mass quantities of commodity chemicals. I’m talking in the one to 100 of kg range. People naturally take prices as fixed in concrete.

This is especially unfortunate or even tragic for materials that are very unusual. Items that have a low volume or minimal competition are products whose price has not been made rational through the forces of the market place. Competition has not forced the price to an optimum level.

Price is determined by what the market will bear. If there is limited exposure of a product to the market, then a rational price probably has not been reached and someone is leaving money on the table. Prices are initially based on some reasonable multiple of costs. The demand picture and the sellers anxiety to move product determine the real price point.

Much has been written about negotiation. I have no new concepts to add except a reminder that the best deals can come from multiple iterations of offer/counter-offer. Only by going into cycles of offer/counter-offer can you find out exactly what is possible to get from the bargaining.

Some companies, like SAF for example, are notoriously rigid in their approach to sales. I have found that they do fix their prices in blast resistant concrete. SAF is uber-aggressive in the marketplace because they are after total global domination. But not all companies are like this. Many are pleased to make a deal to get some material out of inventory.

What is troublesome for manufacturers of new or obscure products is that the initial price may frighten off a buyer. If the buyer recoils in horror from a price without any attempt to negotiate, then they lose the benefit of that product and the seller loses the sale and perhaps the entire market future of the material. I have seen this happen many times.

What makes this a difficult issue for the seller is that you don’t want to seem too anxious to drop your price. That just telegraphs to the buyer that they should expect a better price. The seller should have a front price that they want and a fallback price that they can live with. It is better to have the fallback price than nothing.  The skill comes in the smooth application of salesmanship.

A good sales person watches the prospective buyer carefully for flight impulse and silently swoops in like a vampire for the seduction and the lusty bite. 

Hip-motized by Doctrine

It is interesting how people can adhere to abstract doctrines while reality rages all around them.  In particular, I am thinking of a recent “conversation” with an economist friend. A fundamentalist libertarian, he steadfastly refuses any hint of pragmatism in favor of his utopian idealology promoted by certain Austrian economists.

To the economist, anthing that smells like collectivism of any sort is deemed an automatic throwback to the failed ideals of Marx. It’s all about the individual and his property. Nevermind that any anthropologist will observe that people spontaneously form groups and associations to lessen risks and burdens associated with survival. 

Harm comes to people and society when those with a power position advocate for abstract doctrines over the welfare of citizens.  Notions of political structure, reproductive issues, qualification for acceptance into an after-life, or slavery are all sacred abstractions on which people have taken stands and many have killed or been killed for.

How many people have needlessly died because of the squeemishness of celebate men with the idea of condoms? How much destruction was released in Southeast Asia due to the opposed idealogies of Marxism and Capitalism?

Today, Americans face continued endurance of a broken health care system because certain vocal idealogues profess doubts over “Socialized Medicine”? American health care is already socialized to some extent. But in a way that favors the flow of cash to the coffers of corporate medical providers and insurers. Why do you think Warren Buffett is so enthusiastic about owning insurance companies?  You get paid up front. Surely there are other health care models out there that we can emulate.

Russian Oil Production in Apparent Decline

According to an article by Greg Walters at Bloomberg.com, crude oil output in Russia is expected to decrease for the first time in 10 years.

“Two years ago, we said the growth rate was falling, and we said this was bad for Russia, remember?” Trutnev said in televised remarks after a government meeting in Moscow today. “Now we’re saying the production rate is falling this year. This is not a bogeyman, unfortunately, this is real,” Trutnev said, without giving a specific forecast.

The petroleum problem in Russia seems to stem from the lack of investment in exploration in combination with exorbitant taxes on the industry.

Gail the Actuary has an interesting post on the post-peak-oil economy. Gail is a contributor to The Oil Drum Discussions.  It’s all kind of gloomy.  Time for a nice glass of Bordeaux.

Monte Carlo Analysis

Th’ Gaussling is surfing the net looking at freeware. The possibilities are amazing. It’s like I’ve crawled up from underground onto a sunny Brazilian beach full of nubile sunbathers frolicking in the waves. It’s all just too wonderful to be true …

[sound of needle scratching across record]

So I’m new to Monte Carlo simulations. I have some economic modeling to do and it has become apparent to me that mere spreadsheet grinding isn’t enough.  To make a more convincing case I need to introduce plausible cost variances somehow by mixing and blending various kinds of guesswork distribution curves from the elements of the project. There is a particular Project Risk and Contingency Analysis software that seems reasonable to start with. It would be interesting to hear of experiences others may have had with Monte Carlo project modeling.

Ear to the Ground

My comments on recession come strictly from news and from petrochemical industry publications. I have not seen any indication that manufacturing of specialty chemicals (at least in the waters I swim in) are as yet affected by the economic turmoil that the lending fiasco triggered. Eventually orders will taper some, but the how much and when is not at all clear.

It takes a while for the effects of a downturn to filter upstream to all sectors of chemical manufacturing. The first effects will likely be a pushback on delivery of existing orders. Then, the period between succesive orders will lengthen as businesses closer to the consumers will start to trim down inventories and throughput.  Finally, sales forecasts will begin to report spotty sales projections 2 or 3 quarters out. Eventually, you run into those weak quarters and have to find a way to limp through them.

The important question relating to petrochemicals (aromatics, naphtha, ethylene, propylene, etc) is where does price elasticity really kick in for hydrocarbon intensive goods as crude prices continue to rise and the dollar continues to devalue? 

Packaging materials like PE, PS, and PP, etc. are very often not the primary product consumers are looking for. They are produced for sellers of consumer goods as packaging materials. The purchasing decision maker is not the person strolling down the isles of Wal-Mart, but rather the product manufacturers who have to package the goods. 

This economic disturbance seems unique. Demand from the global middle class is growing as the US economy falters.  Demand for hydrocarbon fuels and manufacturing feedstocks is strong from Asia for their own consumption. But Asian production is also strongly linked to the demand of their products from the west. Predicting how this thing plays out is very tricky. 

Polymer membranes, HDPE pipe, PVC pipe, automotive assemblies and fascia are all large consumers of hydrocarbon products. Demand for these materials, obviously, should parallel the health of construction and automotive industries. But as the US transitions to a net importer of polymers, the connection to US economics is murky.

I suppose the best business to be in is war profiteering and security, at least as long as a war president is in office. It seems to be shielded from the raw forces of economics. As long as the gov’t can print money, special interests can be paid.  A good career would be as a translator between Arabic and Mandarin.

Platinum Group Metals Update

14 March, 2008. As the deepening US gravity well continues to tug at the recession asteriod that is looming ever larger in the sky, we see a steady line of investors boarding Platinum Group Metal (PGM) investment vehicles for immediate launch off this doomed planet. 

Monday and friday opening EIB prices over the week of 3/10/08 thru 3/14/08.

Silver–  US$19.70/toz;  US$20.77/toz.

Gold–  US$971.55/toz;  US$1,0005.86/toz

Palladium–  US$470.00/toz;  US$516.00/toz

Platinum–  US$1,960.00/toz;  US$2,110.00/toz

The geology of PGM deposits is quite interesting. There are numerous resources detailing the Bushveld Igneous Province (or Complex) in South Africa. Check it out.

Shermer’s “Mind of the Market”

Google has been posting a series of interesting talks by contemporary authors. This talk is by Michael Shermer, author of Mind of the Market, and editor of the popular magazine Skeptic. It is a lengthy 53 minute video, but I would highly recommend it. I think Shermer has a good grasp on the anthropology of our present world.

This is off-topic, but useful. This link gives a bunch of really good hints on how to save money for your start-up company.

PGM Prices Remain Strong

The Platinum Group Metals (PGM’s) continue to trend upwards.  Last friday 0n the EIB rhodium opened at US$9,050.00/toz. Rh remains in strong technical demand and prices are propped by a great many overlapping factors. Uncertainties in the mining business in South Africa buoy uncertainty among investors. Recent electrical distribution shortfalls and blackouts have interrupted production as have mine floods, labor disputes, and a shortage of experienced miners and managers.

Automotive pollution catalytic converters dominate the demand for platinum and rhodium. As demand for Pt and Rh continues to grow, look for companies to switch to palladium in key applications.  Russia holds a strong position in Pd inventories. As demand for Pd rises, look for Russia to exercise its muscle.

As Au and Pt prices continue to climb, look for jewelry demand for these metals to taper off.  Asian demand for these metals is substantial. Eventually, jewelry prices will temper demand for gold and platinum.  Meanwhile, interest grows in North American PGM resources.

Literature Swim. The Guo-Liu Catalyst.

Guo & Liu Catalyst

The literature train station is overflowing with diverse catalysts for the large variety of coupling reactions out there, as is the patent literature. Parties scramble to get window seats on the IP Express, the high speed non-stop to that Golden City on the Hill. 

A recent JOC article disclosing an inexpensive catalyst system that struck me as interesting.  The article by Guo and Liu emphasizes economy and so discloses a phosphorus-free bidentate ligand system that affords Heck and Suzuki-type coupled products.  There are pluses and minuses to this system, as is the case for most catalysts.

On the plus side with the Heck and Suzuki reactions, both activated and deactivated aryls gave decent yields. On the minus side, the Heck coupling reaction is a bit slow. A fair amount of energy input was needed- 130 C in DMF over 30 hours. On the Suzuki side, most reported reactions resulted in good yields, except for the aryl chlorides. The relative inertness of chlorides is not particularly unusual, but it may cause this catalyst to be passed over in some applications where the less atom-efficient bromides and iodides have been targeted for replacement.

Finally, the apparent requirement of DMF is rarely happy news. Regardless, I have no doubt that this catalyst will find its way into the future literature and many clever applications will be revealed.  As of this writing, I was unable to find a US patent by inventors Guo and Liu claiming this technology. Since there is a 1 year limit on the filing of a patent application following disclosure, this technology could be in patent prosecution at present. Or not. Wouldn’t it be a happy thing for it to be in the public domain?